Traditional vs a Roth IRA

There are two different types of IRAs available today, the traditional IRA (deductible and non-deductible) and a Roth IRA. Traditional IRAs are usually funded with pre-tax dollars, which means you will have to pay taxes on the entire amount when you withdraw your funds. Roth IRAs are funded with after-tax dollars, and can be taken tax-free when certain conditions are met. You may be hearing a lot lately about converting your traditional IRA to a Roth IRA in order to take advantage of tax-free withdrawals in retirement. In 2010, more people will become eligible for Roth Conversions because of the Tax Increase Prevention and Reconciliation Act of 2006. Currently, an individual with modified adjusted gross income of more than $100,000 (either married filing jointly or single) cannot qualify for a conversion. Beginning in January, 2010, however, anyone regardless of their income will be able to convert. In addition, the income taxes due for the conversion can be paid over two years (remember the amount converted will be added to your income for the year) rather than having to pay all the taxes in one year. With this new legislation you will be able to include half the amount converted when you file your 2011 taxes and the other half when you file your 2012 taxes.

There are many reasons you may want to consider converting your traditional IRA to a Roth, such as being able to take tax-free distributions of earnings after 5 years and age 59 ½ and the ability to pay taxes at possibly a lower tax bracket now than you would in the future. Whether or not to convert your traditional IRA to a Roth IRA will depend on many factors including your ability to pay the income taxes due from a non-IRA account, your time horizon before taking distributions (the longer you can wait to take distributions the better), and the difference between your current and future income tax bracket. As with any important financial decision, you should always talk with your personal financial advisor about your specific situation to determine whether it is the right choice for you.